The Commissioner of Income Tax vs Rohtas Industries Ltd.

This is a reference u/s 61(1) of the Income Tax Act at the instance of the revenue in relation to the assessment year 1950-51, the corresponding accounting year being from the 1st of November, 1948 to 31st of October, 1949.

For the assessee company a piece of land was acquired under the Land Acquisition Act and the compensation was determined therefor, which was paid by the assessee. Since possession was taken of that land before the total compensation money, as finally determined under the Act, was paid, a sum of Rs. 22,438 was paid by the assessee as interest as required u/s 34 of the Land Acquisition Act. The assessee claimed, that payment as an expenditure to be deducted from his total income u/s 10 of the Income Tax Act. He claimed the deduction particularly under Sub-clause (iii) of Clause (2) of Section 10, which was disallowed by the Income Tax Officer on a finding that it was not paid on any capital borrowed. The Appellate Assistant Commissioner took the same view. When the matter came before the Tribunal at the instance of the assessee, the deduction was allowed. The Tribunal took the view that the payment of interest u/s 34 of the Land Acquisition Act was not an additional purchase price of the land acquired, and observed:

"The position might have been different if the assessee itself was not given possession till after the payment of the purchase price. The actual position was that the assessee was using, the land for purposes of the business and in substance the assessee was also using for purposes of the businesses a part of the purchase price of the land to be paid by the assessee. The position is more analogous to interest payable on trade debts. Even if the payment has not to be dealt with u/s 10(2)(iii), it will, in our opinion, form an admissible deduction u/s 10(2)(xv)."

The revenue wanted a reference as they felt aggrieved by this order of the Tribunal.

Both the Income Tax Officer and the Appellate Assistant Commissioner held that what was paid by the assessee company as interest u/s 34 of the Land Acquisition Act was a part of the compensation money; in other words, it was a part of the price of the land acquired. In that view, they thought that it was a part of the capital expenditure and was, therefore, not deductible from the total income. It appears from "the order passed by the Tribunal that they thought the position to be similar to interest payable on trade debts. But in that opinion also, they do not appear to have been confirmed because after making that observation, they immediately said that if the deduction was not permissible under Sub-clause (iii) of Clause 2 of Section 10, it was admissible under Sub-clause (xv). On the facts of the case, the deduction cannot be permitted under Sub-clause (iii), because the interest was not paid on any capital borrowed for the purposes of the business.

Learned counsel appearing for the assessee wanted to establish that Sub-clause (iii) of Clause (2) of Section 10 of the Income Tax Act would be attracted to the present case. But he could not substantiate that position either with citation of any authority or with any argument with reference to the facts involved in the present case in regard to the acquisition of the land or the payment of interest in that connection. His argument, however, was moos emphatic relying upon the provision under Sub-clause (xv) of Sub-section (2) of Section 10, which reads as follows:

"Such profits or gains shall be computed after making the following allowances, namely:--

............ (xv) any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation."

His argument was that the interest that was paid in the present case cannot be said to be a capital expenditure as it was not a part of the price of the land acquired. It was not a part of the compensation which was determined for the compulsory acquisition of the land under the Land Acquisition Act. It was not a matter which came within the provisions of Section 23 of that Act that was required to be taken into consideration in determining the amount of compensation payable to the owner of the land. He relied upon the decision in the case of Dr. Shamlal Narula Vs. Commissioner of Income Tax, Punjab, in which their Lordships of the Supreme Court laid down that interest paid u/s 34 of the Land Acquisition Act cannot be said to be a part of the compensation and, therefore, a part of the price of the land acquired. This part of learned counsel''s contention is clearly sound. (5) Next it is to be seen whether the requisite conditions as provided in Clause (2)(xv) of Section 10 of the Income Tax Act are satisfied in this case to permit the deduction claimed by the assessee. We have already seen that the payment of interest of Rs. 22,438 was not of the nature of capital expenditure. Whether it was spent wholly and exclusively for the purpose of the business of the assessee company will depend for what purpose the land was sought to be acquired by the Government. Section 6 of the Land Acquisition Act provides that when the appropriate Government is satisfied that any particular land is needed for a public purpose, or for a Company, a declaration shall be made to that effect under the signature of a Secretary to such Government or of some officer duly authorised to certify its orders, provided that no such declaration shall be made unless the compensation to be awarded for such property is to be paid by a Company, or wholly or partly out or public revenues or some fund controlled or managed by a local authority. In the instant case, there is no dispute that the land in connection with which the interest was paid, was acquired for the assessee company and the declaration was made for that purpose u/s 6(1) of the Land Acquisition Act by the Government. It is to be noted that the provisions under Part VII of the Land Acquisition Act lay down that the declaration and other provisions under Sections 6 to 37 shall not be put in force in order to acquire land for any Company, unless with the previous consent of the appropriate Government, nor unless the Company shall have executed the agreement (see Section 39). Section 40 lays down that a previous enquiry shall be made in regard to certain specified matters before the consent of the appropriate Government is given to the acquisition of any land for a company. Section 41 provides for the agreement to be executed by the Company with the Govern-merit, and the following section requires the publication in the official Gazette of that agreement. All these provisions indicate that no land can be acquired for a company unless it is for any of the purposes stated in the relevant sections, more particularly if the purpose of acquisition is, not in connection with the purpose for which the company is incorporated. In that view of the matter, it has to be presumed in a case where the Government has acquired any land for a Company that the purposes for which the acquisition was made, was for those mentioned in the Act itself, and the consent of the Government was given after a due enquiry held in that respect and an agreement was executed by the Company with the Government. No doubt, this aspect of the question does not appear to have been considered by the Tribunal, but in view of the fact that there was no dispute that the land was acquired for the assessee company by the Government under the Land Acquisition Act, it can be safely presumed that the acquisition was for the purpose of the business of the company. The payment of interest under consideration was in relation thereto. Therefore, we are of the view that the expenditure claimed by the assessee company would come within Sub-clause (xv) of Clause (2) of Section 10 of the Income Tax Act. As extracted above, the Appellate Tribunal has stated in Para. 5 of its order that the assessee was using the land for purposes of the business as also a part of the purchase price of the land to be paid by it. Thus both when the company approached the Government for acquiring the land and subsequent to the acquisition when the land came in possession of the company, it was in connection with the business of the assessee.

In the case of BOMBAY STEAM NAVIGATION CO. (1953) PRIVATE LTD. Vs. COMMISSIONER OF Income Tax, BOMBAY., , their Lordships of the Supreme Court observed:

"Whether a particular expenditure is revenue expenditure incurred for the purpose of business must be determined on a consideration of all the facts and circumstances, and by the application of principles of commercial trading. The question must be viewed in the larger context of business necessity or expediency. If the outgoing expenditure is so related to the carrying on or conduct of the business, that it may be regarded as an integral part of the profit-earning process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure."

This test is satisfied in the present case because of the presumption that can be drawn in law from the circumstances of this case that the land was acquired for the Company by the Government under the Land Acquisition Act.

For all these reasons, we are of the view that the expenditure was rightly allowed, and would answer the question in the affirmative and dispose of this reference. In the circumstances of this case, we do not feel inclined to award any cost against the Department.